The information contained in this hypothetical case study is to be used only as a case study example for illustrative purposes. The information in this hypothetical case study is both factual and fictional. This hypothetical case study does not take into consideration other investment options for completing a 1031 exchange, including a Tenant-in-Common, or TIC. Please refer to the Key Assumptions & Disclosure below.
A Delaware Statutory Trust (DST) is designed to provide a turn-key, passive real estate investment with potential income. These investments may be completed as a direct investment or as part of a 1031 exchange. Both strategies may provide a potential tax-deferral benefit to property owners.
The property owner (“Owner”) is a high net worth, Baby Boomer and owns a multi-family apartment complex, purchased in 2002. The property was purchased for $1 million, consisting of $500,000 in cash and $500,000 in debt. The Owner is nearing retirement and is no longer interested in managing his own commercial properties. The Owner is also concerned about properly structuring his estate and the welfare of his beneficiaries. The Owner and his financial advisor evaluated options that would best suit the current financial and lifestyle status of the Owner.
The Owner recently received an offer for the multi-family apartment complex for $2 million. Currently, the Owner has $200,000 remaining on the loan and would net $1.8 million. The Owner faces a tax liability of $528,122. The Owner may have the option of selling the property outright and taking on the tax burden or exploring tax deferment opportunities.
Knowing the Owner is not interested in owning and managing a new property, but remains concerned about potential tax liability, the Owner’s advisor recommends completing a 1031 exchange and, in particular, investing the proceeds in a DST.
A DST may bring multiple benefits as a passive investment, pooled within a trust. Not only may the Owner utilize the potential tax savings from the 1031 exchange, but the management of the property is taken out of the hands of the Owner and handled within the DST by a professional real estate investment company. The advisor believes this is a suitable investment for the Owner given the fact that, the Owner is a real estate investor already and understands the risks and illiquidity associated with real estate investing. Although the DST is an illiquid investment, the Owner is a long-term investor and has an ample amount of liquid investments he could access may the need arise for additional cash.
After meeting with his financial advisor, the Owner has decided to sell the property and, through a 1031 exchange, invest the proceeds into a DST. By doing so, the Owner may defer his tax liability of $528,122 and invest his entire $1.8 million of proceeds into the DST. He no longer has the hassle of property management, and may be entitled to a portion of the profit when the property is eventually sold. The Owner may also preserve the ability to execute another 1031 exchange after the conclusion of the DST investment.
1031 exchanges can be a tax-deferral strategy for many real estate owners. Those looking for a turn-key, passive potential income-oriented investment may find a DST structure compelling. Platform Ventures can help advisors determine the most suitable path to minimize tax liabilities and achieve investment goals for their clients. The 1031 exchange and the selection of the DST can be completed within the RealtyClub platform, owned by Platform Ventures. This may allow for a seamless process from Qualified Intermediary selection, due diligence, document review, execution and closing.
Federal Capital Gains Tax Rate: 20%
Net Investment Income Tax: 3.8%
California State Tax Rate: 13.3%
Original Purchase Price: $1 million
Accumulated Depreciation: $410,240
Sales Price: $2 million
Depreciation recapture tax $157,122
Capital gain $371,000
Total tax paid $528,122
This is hypothetical case study is intended for informational purposes only and does not constitute legal, tax, accounting advice or any other advice of any kind. Calculations includes herein are based on key assumptions including, but not limited to, assumptions based on tax return filing status, location of property, state tax rate(s), individual tax bracket and rates, tax rate changes during the holding period, AMT, terms of the exchange, unrecaptured Section 1250 Gains, depreciation schedule/ Section 1250 recapture, capital improvement depreciation, financing and interest rates, and property depreciation. For more detail relating to the assumptions relied upon herein, please conduct us. Nothing herein represents actual tax savings or results. Actual events are difficult to predict are beyond our control and may differ from those assumed. There can be no assurance that any estimated tax savings or results will be realized, that forward-looking statements will materialize or that actual results will not be materially lower than those presented. No representation or warranty of any kind, express or implied, is made as to the accuracy or completeness of the estimated calculations, projections and other information contained herein, and nothing contained herein shall be relied upon as a promise or representation whether as to the past or future results.
Please note, in addition to all other key assumptions listed, the model also assumes continuous and consistent growth with respect to both the real estate market and the liquid securities market. However, it is important to note that all markets could change at any point in time and this model is not attempting to predict future market activity. It is simply a model used in order to provide a tool for informational purposes only.
If the strict timeline and procedural rules are not followed, a 1031 exchange may be disqualified. Further, there is no guarantee that the IRS will approve each individual exchange, there is no guarantee that tax laws will not change in the future, and there is no guarantee that the IRS will not change its application of present tax laws to future cases. 1031 exchanges involve exchanging investment real estate for investment real estate, which means the illiquidity from one transaction to the next remains the same. Risks associated with a DST include, without limitation, the inability of the DST owners to actively manage the property, the inability to refinance at the end of a loan term without the use of a separate, springing LLC, and the risk of not meeting the requirements for 1031 exchange tax treatment. Additionally, the underlying investment of DSTs is real estate and, therefore, DSTs are subject to the same risks that apply to real estate.
Investment advisory services are provided by Platform Investments, LLC (“Platform Investments”), a wholly owned subsidiary of Platform Ventures, LLC. Platform Investments is an SEC registered investment adviser with its principal place of business in the State of Kansas. Registration of an investment adviser does not imply any level of skill or training. Securities offered through North Capital Private Securities, member FINRA/SIPC.